The Loan Charge All-Party Parliamentary Group report, ‘How contracting should work’, looks at the factors that have led to the use of tax avoidance schemes and the changes that could be considered to discourage their use in the future – and especially avoiding another Loan Charge scandal.

The report states: “We believe that the off-payroll reforms, which are now being rolled out into the private sector from April 2021, should be amended during the passage of this year’s Finance Bill and that tax law and employment law should be aligned. The direct threat of being classed as a ‘deemed employee’ is a fundamental problem for contractors/freelancers and client organisations.”

Regarding the use of unregulated umbrella companies, the APPG report goes on to state: “We call upon the Treasury and HMRC to accept the clear and demonstrable role that the so-called ‘IR35’ legislation has had in the proliferation and use of unregulated umbrella companies and related arrangements, some of which have then involved ‘disguised remuneration’ schemes. Instead of denying this reality, the Treasury should seek to implement legislative changes that create tax certainty for freelance workers which are appropriate and fair.”

Commenting on the report, Dave Chaplin, CEO and founder of contracting authority ContractorCalculator and IR35 Shield, said: “There are some strong recommendations and worrying observations in this report and lots more work needs to be done so that contractors are treated fairly and properly.

“Before any legislation is passed, which won’t happen overnight, the supply chain should seek to introduce clear and better transparency to ensure workers are given full rights if they are considered to be ‘deemed employees’ under the new off-payroll tax rules that kicked in earlier this week.

“Contractors who now find themselves ‘inside IR35’ are in an untenable position – they are working PAYE but have none of the rights that come with permanent employment… It’s time to finally overhaul the discredited IR35 legislation, which everyone knows doesn’t work, and come up with a way to properly recognise contracting and freelancing in the tax system and ensure people are either classed as self-employed or as employees with full rights and benefits.”

And Crawford Temple, CEO of Professional Passport, an independent assessor of payment intermediary compliance, said: “We have been pressing for change for some time and calling for action, so I would urge the government to heed the findings of the APPG report and take action.

“Many contractors have been unwittingly duped into schemes and put themselves at significant personal financial risk. It is likely that with the introduction of the new off-payroll legislation earlier this week, many more contractors could be exposed to such schemes.”

On that point, the inquiry finds significant issues with the supply chain, which it says has been described as the ‘Wild West’. The report mentions: “Recruitment agencies demanding ‘kickbacks’ or incentives from umbrella companies for being added to a preferred supplier list/recommended to clients, even sometimes including fitted kitchens and holidays for recruitment agency directors. This then incentivises non-compliant providers (who because of non-compliance have higher margins) to offer large bonuses to gain access to potential clients.”

It went on to say that in some cases, contract, freelance and locum workers were being “pushed to use a specific umbrella company and, in other cases, workers are given no choice as to which umbrella company to use”. I continued: “This is a particular problem when the only source of work in a sector is via recruitment agencies. This is the case for many workers including some lower paid contract and locum workers.”

In response, deputy CEO of the REC Kate Shoesmith told Recruiter: “When we gave evidence to this APPG, we repeated our long-standing call to action to several governments now – umbrella companies need to be regulated. Strong regulation of umbrella companies would help to solve many of the issues highlighted in the report and create a more level playing field in the sector. It is good to see the APPG echoing that in its report.

“We want to understand more about the kickbacks and tax avoidance schemes talked about – in fact, when we gave evidence to the committee they publicly said to us that REC members are likely not the issue. The REC Code of Professional Practice requires members to act with integrity, transparency and to the highest ethical standards at all times. Treating candidates well is just basic business practice. Where potential breaches are reported to us, we will investigate further. The REC also supports the statutory bodies with any investigations they conduct into breaches of the Conduct Regulations.

“We always recommend that members do their own due diligence into any umbrella company before engaging their services. Our next step will be to work with the APPG and others to really push for action on the small number of poor suppliers out there.”

Chaplin adds: “There are, of course, concerns about some umbrella companies not acting in the best interests of their contractors, but it’s certainly not all of them. A strong dose of transparency, better auditing and some additional regulation, should hopefully drive the unethical ones out the market. HMRC also need to be much better at pre-emptively shutting these operators down by leveraging the data they already collate from agencies.
 
“This ‘wild west’ clearly needs some cleaning up but with the sheriff Matthew Taylor no longer in post who will pick up the mantle and sort it out before more damage is done?”

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